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Why the Biotech Market is Looking to Cannabis for the Future

It’s possible that there has been no greater contributor to the cultural shift currently occurring around cannabis use in North America than the growing understanding of its medical applications.

Marijuana has long carried an unfair stigma resulting from fear and hysteria rather than an inherent danger derived from its effects. For many, it was plain to see that marijuana’s classification as a Schedule I drug didn’t really make much sense. However, as long as the argument for rescheduling centered on laxer laws for recreational use, gathering the sort of political and cultural consensus necessary for real change was an all-but impossible challenge.

Yet, as medical professionals and patients began to learn that cannabis is, in fact, a powerful botanical that can be utilized to treat a range of painful and debilitating diseases, perceptions started to shift. Maintaining the stigma surrounding marijuana has become difficult given the plant and its derivatives’ efficacy as medicine, specifically for cancer patients and epileptic children.

A Huge Market Opportunity

With a year to go until the 2016 elections, there are 23 states – accounting for nearly half the US population – that allow for medicinal use of marijuana. This is along with the entire nation of Canada, where medicinal use of marijuana has been available nationwide since 2001.

This sort of rapid expansion has also meant a rapid expansion in the industry, as well. According to Marijuana Business Daily’sMarijuana Business Factbook 2015, sales of medicinal marijuana grew 25% to $2 billion in 2014. And, with a handful of new states joining the ranks with legalized medicinal use, the medical marijuana market is estimated to grow to $3.3 billion by 2018.

The rapid expansion of the cannabis industry has instigated huge shifts in the stocks associated with these companies. The biotech sector of the Cannabis Index created by Viridian Capital Advisors nearly doubled in value in 2013 followed by gains just shy of 767% for 2014.

Even still, indicators show that this is just the tip of the iceberg. Estimates for the potential size of the total cannabis biotech market are as high as $20 billion for the United States alone. Much of this growth is the result of capturing existing demand as the shifting regulatory atmosphere grants more and more Americans access to cannabis. In addition, new research continues to show that cannabis plants are home to a wide variety of chemical compounds with effects on the human body that are only just beginning to be understood.

A New Discovery Reinforces Medical Cannabis Use

The discovery of the endocannabinoid system has dramatically changed what we understand about cannabis. The human body contains a collection of neuromodulatory lipids and receptors that are the new focus of scientific research, most notably from researchers in Israel. Cannabinoids are chemical compounds that react with different receptors to affect a range of psychological functions from appetite and pain-sensation to mood and memory.

Cannabis contains over 60 different identifiable cannabinoids which have varied effects and could potentially be developed into treatments. However, two in particular are of note: (-)-trans-delta-9-tetrahydrocannabinol (∆9-THC or, more commonly, THC), which provides most of cannabis’ psychoactive effects, and cannabidiol (CBD), which has been the center of much of the most exciting medical research surrounding the endocannabinoid system.

While research continues to investigate its medical efficacy, there appears to be indications that CBD could provide the basis for a powerful anti-seizure medication. In particular, there’s early anecdotal evidence of high-CBD strains being used to treat Dravet syndrome, a devastating form of epilepsy that affects young children. The results have been promising enough that several treatments for Dravet syndrome and Lennox-Gastaut syndrome (another form of childhood-onset epilepsy) utilizing CBD have received Orphan Drug status, an FDA designation that streamlines approval for drugs that target rare and otherwise untreatable diseases, in the United States.

Five Companies Primed to Take Advantage of Cannabis Sector Growth

The use of cannabis in medical treatments has created an exciting and fast-growing segment of the industry. For years, the legal status of the plant in the United States and Canada has hampered research efforts, but now there are a number of health care companies developing treatments that utilize cannabis and were developed through growing knowledge of the endocannabinoid system. Cannabis biotechnology and pharmaceutical companies represent an intriguing mix. Most of these companies trade on the Over-the-Counter (OTC) markets with low liquidity and high volatility but with the prospects for potentially significant growth should they be able to bring any portion of their product pipelines to market. However, some companies have researched, developed, or commercialized proven treatments and generated enough revenue and cash flow to warrant a listing on a NASDAQ exchange.

Market Cap: $1.94 billion

GW Pharmaceuticals is an established leader in the cannabis biotech sectorwith a treatment already on the market and more promising new drugs in its pipeline, making it a more stable investment compared to the small-cap biotech market.

The company traces its origins to 1988, when Dr. Geoffrey Guy and Dr. Brian Whittle obtained what was, at the time, the only cultivation license issued in the United Kingdom. They have certainly seized the opportunity, since. The company currently markets Sativex® for treatment of spasticity due to multiple sclerosis. Sativex® has been launched in 15 countries, including the United Kingdom, Spain, Italy, and Germany, and is receiving approval from another 12.

However, the current excitement surrounding GW Pharma is largely focused on their development of Epidiolex, which has Orphan Drug status for treatment of Dravet syndrome, Lennox-Gastaut syndrome, and tuberous sclerosis using CBD. GW Pharmaceuticals’ stock has been generating extraordinary returns for some time, rising 1000% over the past five years, including a 35% increase over the last year.

However, Insys’ other three drugs, one currently on the market and two in the product pipeline, all utilize cannabinoids in their treatments. The Dronabinol SG Capsule is a generic version of AbbVie’s (ABBV) Marinol®. Dronabinol is a synthetic analogue of THC that is used to help stimulate appetite in HIV/AIDS patients as well as cancer patients undergoing chemotherapy.

Insys’ product pipeline includes a cannabidiol oral solution under develoment for the treatment of Dravet syndrome and Lennox-Gastaut syndrome under the Orphan Drug program as well as a Dronabinol Oral Solution that could have advantages over the Dronabinol SG Capsule.

Like GW Pharma, Insys has both promising drugs in its pipeline and money makers that are already on the market. Last year, the company more than doubled its revenue, following the previous year’s year-over-year revenue growth of nearly 550%, and looks on pace to significantly grow revenue again this year.

Zynerba Pharmaceuticals, Inc. (ZYNE)

Market Cap: $127.8 million

Zynerba, the successor company to AllTranz, Inc., is the most recent addition to the public cannabis biotech sector, and one of the few companies in the industry that went public through an initial public offering. AllTranz was bought and new management with significant expertise was brought on in order to run the company. Zynerba began trading on the NASDAQ exchange in August 2015 after closing its IPO.

Zynerba is dedicated to developing synthetic cannabinoid therapeutics for transdermal delivery for patients with significant unmet needs.The company is currently evaluating two patent-protected product candidates, ZYN002 and ZYN001. ZYN002 is the first and only synthetic CBD formulated as a patent-protected permeation-enhanced gel for transdermal delivery for the treatment of refractory epilepsy, Fragile X syndrome, and osteoarthritis. ZYN001 is a pro-drug of THC that enables transdermal delivery via a patch. Zynerba is studying ZYN001 in patients with fibromyalgia and peripheral neuropathic pain.

Nemus Bioscience, Inc. (NMUS)

Market Cap: $15.62 million

Nemus is currently the only partner of the University of Mississippi for the development and commercialization of drugs derived from cannabis extracts or cannabinoids. The University of Mississippi is the only U.S. entity authorized by the federal government to cultivate cannabis on behalf of the federal government, as well as holding aDEA registration to conduct cannabis research and previous DEA registrations to cultivaite cannabis and manufacture extracts for the development of drug candidates. Nemus renewed its partnership with the University of Mississippi in July 2015.

Nemus is currently researching and developing five product candidates. TwoNB1111 for treating glaucoma and NB2221 for treating spasticity in multiple sclerosis, are in the preclinical stage. Three others,NB51R1 targeting anxiety, NB23R1 targeting epilepsy, and NB31R1 targeting methicillin-resistant Staphylococcus aureus (MRSA), are in the research stage.

Nemus has not yet generated significant revenues from its operations. However, through its partnership with the University of Mississippi and its management’s expertise in drug development, Nemus appears poised to take full advantage of the growing cannabis biotech opportunity.

Market Cap: $5.78 million

InMed Pharmaceuticals utilizes a “network-based platform” for the identification of novel plant-based (including cannabis-based) therapeutics. This process utilizes comprehensive algorithms to integrate data from numerous bioinformatics databases, a database on the structure of currently approved pharmaceutical products, and an extensive database of over 200,000 phytochemicals (including phytocannabinoids) in order to more effectively and efficiently select active compounds for the treatment of targeted diseases.

InMed’s network approach allows it to save valuable resources (time and money, specifically) that are involved in the tenuous research and development process for drug identification. By leveraging data and analytics, InMed can sift through larger amounts of prospective drug candidates in order to more likely identify a viable therapeutic.

Currently, InMed has two products in its pipeline: INM-750 for the treatment of epidermolysis bullosa, and INM-085 for the treatment of glaucoma. INM-750 is a topical formulation based on polymer nanotechnology currently in the preclinical stage that is designed to suppress pathological skin growth, differentiation, and inflammation in epidermolysis bullosa. INM-085 contains a proprietary mixture of cannabinoids and non-cannabis-based active ingredients, also in a topical formulation, that has been designed to be applied directly to the eye. This formulation was developed through 12 months of discovery and preclinical studies in order to develop a safer formulation for lowering interocular pressure.

The Ground Floor of a Major Investment Opportunity

The biotech sector of the cannabis industry currently displays exciting prospects. The movement to legalize marijuana for medicinal use continues to gather support, and this growing acceptance of cannabis is leading to further scientific research into the endocannabinoid system. As this research continues, cannabis, and the myriad of compounds it holds, could be utilized to unlock a range of new treatments that could help millions of ailing people live happier, healthier lives.

The potential of cannabis and its constituent compounds to be utilized for numerous medical efficacies has created a significant investment opportunity. Accelerating research and development initiatives and widespread changes in cultural perceptions of cannabis have the potential to create a perfect storm for the biotech sector from which early investors could reap extraordinary returns.

A previous version of this article included the company Medipure Holdings, Inc. This company received a cease trading order (CTO) from the British Columbia Securities Commission on November 4 and has been removed as a result.

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